Putting China's African Oil Hunt into Perspective

Date: 10-25-2006

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HONOLULU (Oct. 25) — China’s high-profile oil diplomacy in Africa has been roundly criticized. But, East-West Center Senior Fellow ZhongXiang Zhang says many of those complaints are based on “exaggerated and erroneous information.” Ahead of the upcoming November 3 — 5 Summit of the Forum on China-Africa Cooperation in Beijing, which heads of over 40 African countries have confirmed to attend, Zhang argues China’s foray into Africa in search of energy supplies has to be put into perspective.

Zhang admits that China is now able to supply some 94 percent of its overall energy needs at home, and estimates put that figure at a still substantial two-thirds by the year 2020. But, “this by no means questions the increased importance of China’s growing oil imports.”

And, those imports have been on the rise. China is now second only to the United States in terms of oil imports.

Zhang says, “China’s economic boom and stagnated supply of domestic oil have produced the growing hunger for foreign oil.” At present, he says, “China imports over 40 percent of its oil consumption and that is expected to rise to 60 percent or more by 2020.” Beijing has also elevated energy security “to the height of importance in China’s foreign policy,” Zhang points out.

Fearful of disruptions along the long sea lines from the Middle East, and realizing it will take much longer than anticipated to see any return on investments in pipelines from Central Asian and Russian fields, China has turned to Africa in a big way. That, according to Zhang, despite “Western criticism of China fueling conflicts and human-rights violations in Africa by selling arms to some repressive regimes in exchange for oil and minerals.”

“Beijing has been building goodwill and strengthening bilateral trade agreements,” with African countries, “awarding aid and forgiving national debt,” Zhang notes. China voluntarily waived $1.2 billion in sovereign African debt when China and 44 African nations formed the China-Africa Cooperation Forum. “To date,” Zhang adds, “Beijing has given more than $5.5 billion in assistance and canceled the debt of 31 least developed African countries.”

China has also pitched in with infrastructure projects. A rail network in Nigeria, improved roads in Rwanda, bridges, stadiums and harbors elsewhere in Africa have all been constructed with Chinese help.

That high profile has paid off in economic relations as well as goodwill. Zhang points out that “bilateral trade between China and African nations hit a record $40 billion last year, up 35 percent from 2004.” And, $22 billion more than Japan’s bilateral trade total on the African continent in 2005.

In recent years, African oil producing nations have also found themselves the destination of traveling Chinese leaders. Zhang says, “This goodwill-based energy diplomacy has helped China make remarkable inroads in striking energy deals with oil-rich African countries in the Gulf of Guinea, as well as the Central African Republic, Chad, the Congo, Libya, Niger, and the Sudan.”

The attention Beijing has directed toward Africa has paid off. In more ways than one. Zhang says “Chinese oil companies’ overseas investments not only ensure a supply of oil, but they also address the concerns about oil security by obtaining equity stakes in overseas oil production.” Africa as a whole now provides over a quarter of China’s oil imports.

And, despite criticism of its oil diplomacy, Zhang says China believes it has not been only a one-way street.

“Chinese oil companies’ investments also help the developing African countries raise their standards of living,” Zhang points out. “China’s assistance, for example, has helped turn Sudan into an oil-exporting country.” Beijing also believes its forays into Africa have helped in other ways too. “Chinese investments in African oil fields help to pump more oil and enlarge the overall availability of oil on the world market,” Zhang notes. “The new addition to the markets may help prevent oil prices rising even higher (on world markets).”

Zhang says “other Asian countries could follow suit,” in the search for energy supplies in Africa. But he adds, “This will not affect the relationship between Chinese companies and their African counterparts, given China’s long-established friendship with African countries and the championing of their interests, not to mention mutual commercial benefits (derived from the deals).”

It could affect price, however.

China and India have gone head-to-head in Africa. And China has come out on top, so far. The reason is simple. “The Chinese oil companies have a history of overpaying for equity positions,” Zhang notes. And, that has not changed. “China has grabbed these deals by overbidding at least 10 percent more than its competitor India.”

In January, the China National Offshore Oil Corp. (CNOOC) bought a 45 percent stake in Nigeria’s Akpo offshore oil and gas field for $2.27 billion … over a quarter-of-a-billion dollars more than India’s state-owned Oil and Natural Gas Corp. (ONGC) was willing to pay. In August 2005, the China National Petroleum Corp. (CNPC) paid $4.18 billion to acquire PetroKazakhstan of Canada, over half-a-billion dollars more than its original bid to keep the Canadian firm from going to the Indian consortium of ONGC and Mittal.

Zhang adds the Chinese are willing to open their pocketbooks wider “because China has viewed paying a higher price than competitors to secure energy resources to be more of a national security issue than about the absolute price itself.”

But, bidding higher than competitors does not always work in a politically charged industry like energy.

Zhang points to last year when CNOOC found itself going up against the U.S. company Chevron in an attempt to acquire California-based Unocal. “Although CNOOC bid $18.5 billion for Unocal,” he points out, “Chevron grabbed the deal for $16.4 billion,” after it became politicized.

The EWC Senior Fellow also points out the cost of China’s oil diplomacy is more than mere dollars and cents. Zhang says Beijing’s critics view China’s growing ties with Africa as purely for oil, and that China is willing to exchange political, financial, and military favors without regard to transparency, development and stability. “Simply put,” he adds, “critics accuse China of mixing business with politics in pursuit of its economic gains in Africa.”

They may have a point. But, Zhang says “China’s options are limited.” He notes that “Western powers have gained control over the best oil fields available, (and) as a late entrant to the international oil game, China has little choice but to strike deals with what the U.S. and others call rogue states to secure oil supplies.”

He adds, “No country would prefer to invest in an unstable regime over investment in a more stable one.” But, “Without a lot of options, China appears quite willing to get oil from wherever it can.”

Zhang says that attitude is seen increasingly in Washington as undermining “U.S. goals of isolating or punishing rogue states that fail to promote democracy, limit nuclear proliferation, or respect human rights.” And, he notes, recent Beijing overtures to Canada and Venezuela, two countries that account for about 25 percent of U.S. oil imports, have also raised some red flags in the U.S.

He does not believe “Beijing’s stance should be swayed by Washington.” But Zhang does suggest “Beijing should take into account many factors including Washington’s growing unease … in particular when U.S. concerns also reflect those of a large section of the international community.”

Zhang admits “the short-term benefit of aggressively pursuing (its current) oil diplomacy without proper consideration of the international community’s concern may hurt China in the longer term.” He notes that China has achieved rapid economic growth and is being integrated into the global economy. Taking that into consideration, Zhang adds that China should realize politics and economics, in the modern world, are not inseparable. “Beijing should think deeply about how to be more nuanced in responding to the concerns and perceptions … of its foreign policy.”

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ZhongXiang Zhangis a senior fellow at the East-West Center in Honolulu. He specializes in energy and environmental economics. Dr. Zhang can be reached at (808) 944-7265 or via email at ZhangZ@EastWestCenter.org